Get-rich-quick schemes: 5 signs you’re being scammed

CONSUMERS are under a lot of financial strain. The World Economic Forum reports that the cost-of-living crisis is affecting people across the globe. With food and fuel prices rising, it’s becoming increasingly difficult to keep financially afloat. On top of that, salaries aren’t keeping up with inflation, making it more difficult to save and build wealth.

It’s during such times of economic difficulty and uncertainty that fraudsters lure unsuspecting consumers into “get-rich-quick” schemes, offering an avenue to make easy money by investing in a “lucrative” financial opportunity.

Nothing beats the prospect of making easy money, and every now and again there seems to be a “get-richquick” scheme circulating on WhatsApp or other social media that seems legitimate. But it’s not.

Our research interests centre on financial systems in emerging economies, and we advocate for financial inclusion and empowering marginalised communities through financial literacy and financial planning. We use our academic platform to share our expertise on finance, including common financial traps people should steer clear of.

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“Get-rich-quick” schemes are one such trap. They are also sometimes called ponzi or pyramid schemes. The schemes are a form of financial fraud. The people running them take money through deception: the misrepresentation of information and identity. They promise financial benefits that do not exist.

You should avoid them because, more often than not, they are bogus and fraudulent business ventures.

There have been some massive fraud schemes over the past 30 years. In the early 1990s, MMM Global — one of the world’s largest and most notorious ponzi schemes defrauded up to 40 million people, who lost an estimated US$10 billion. Ponzi schemes have since resurfaced in different forms in South Africa, Nigeria, Zimbabwe, Kenya, Ghana and several other African countries.

There are five tell-tale signs of a “get-rich-quick” scheme. Watch out for them.

Firstly, they offer exaggerated and above-market returns within a short period of time, with the promise of little to no risk.

There are two golden rules when it comes to investing. The first is that it takes time to make money. Amassing a small fortune within a short space of time should raise questions about the scheme.

The second rule is: The higher the risk, the higher the return. In other words, no investment is risk free or can guarantee significant returns. There is always some risk involved. An investment that promises substantial returns tends to be quite risky, which repels most people with a low appetite for risk.

Secondly, new members are constantly recruited to join the scheme.

Typically, such schemes are sustained by relying on the investments of new members to pay existing members. Once the number of existing members exceeds new members, the scheme goes “belly-up”. At best you lose out on the returns you were promised. At worst you lose all the money you’ve invested.

When the scheme collapses, it is almost impossible to recover the money you’ve lost because you’ve technically given it to a stranger (remember, the definition of financial fraud encompasses the misrepresentation of identity).

Thirdly, there is urgency to join the scheme and no clarity on how the scheme works.

This is a classic characteristic of a “getrich-quick” scheme. There is usually no clear answer about the nature of the scheme, what it invests in, how it generates its returns or the credentials of the organisation.

Legitimate investments are transparent and can provide investors with all the information they need to help them make informed decisions. Unsurprisingly, a proper check of “get-rich-quick” schemes will unmask their fraudulent nature. This is why there’s always the urgency and coercion to make an immediate financial commitment under the guise of missing a once-in-a-lifetime opportunity to get rich.

Fourthly, the scheme is not registered with or regulated by any recognised authority.

Regulatory authorities are important because they monitor the conduct of financial service providers and protect consumers by keeping their best interests in mind. The protection provided by financial regulators also instils confidence in financial systems.

“Get-rich-quick” schemes are not registered and operate outside the framework of regulatory bodies. This makes investors more vulnerable to loss and makes it more difficult to seek legal recourse when the loss occurs.

Legitimate investments are offered by authorised financial service providers and regulated by the Financial Sector Conduct Authority. You can search for any authorised financial service Bomikazi Zeka is asistant professor in finance and financial planning, University of Canberra and Abdul Latif Alhassan is associate professor in development finance and insurance, University of Cape Town.